The African Development Bank (AfDB) and the Government of Djibouti on Monday, August 26, signed the funding agreements, totalling US $7.5 million, for a geothermal exploration project in the region of Lake Assal.

"The exploitation of geothermal potential in the Lake Assal region will enable the Djiboutian population to access reliable, renewable and affordable source of energy," said AfDB's Regional Integration Director Alex Rugamba, on behalf of Gilbert Mbesherubusa, Vice-President, Infrastructure, Private Sector and Regional Integration, during the signing ceremony.

The financing scheme includes a grant and a loan from AfDB's soft loan arm, the African Development Fund to the tune of US $5.3 million and US $0.4 million respectively. It also includes a grant of US $1.8 million from the Sustainable Energy Fund for Africa (SEFA).

The contribution from the AfDB and SEFA will be used to continue to raise more financing and will serve as a catalyst to rally independent geothermal electricity producers.

Speaking at the signing ceremony, Ali Yacoub Mahamoud, Djibouti's Minister of Energy in charge of Natural Resources, commended the African Development Bank for "breathing new life into this 20-year old project".

With this first phase of the project, the government of Djibouti is taking the lead on the first exploration and appraisal drilling phase. The private sector will be responsible, in a second phase, for the production drilling, steam gathering system and electricity production and evacuation to the national grid.

Geothermal development has known a boost in East Africa during the past two years, and has been attracting more and more private investors, thanks to new financing schemes put in place by development finance institutions such as the African Development Bank.

"Those innovative models help overcome the several risks associated with geothermal development, among which the most important one is the exploratory drilling risk, which is related to the probability of hitting dry wells during the exploration and ap praisal drilling phase," said Youssef Arfaoui, Chief Renewable Energy Specialist. "By providing concessional finance to the early stage and high-risk activities mainly related to exploration and drilling, the African Development Bank paves the way for private investors to step in" he explained.

The AfDB has successfully used that innovative model in 2011, for the Menengai Geothermal Development Project, supported by concessional financing to the tune of US $150 million. The Menengai project, once completed, will increase the energy supply in the country by an amount equivalent to the current consumption needs of 500,000 Kenyan households, 300,000 small businesses and some 1,000 GWh for other businesses and industries.

At a much smaller scale, the Lake Assal geothermal exploration project will help expand geothermal development, by building regional capacities, to other Rift Valley countries in Sub-Saharan Africa such as Ethiopia, Uganda, Tanzania and Rwanda, which have considerable geothermal resource development potential.

Currently Djibouti relies mostly on fossil fuels and some hydropower imports from Ethiopia. The majority of the country's current generation capacity is situated in Djibouti City. The existing power stations are old, polluting and expensive to operate. In addition, fuel imports are expensive and require important foreign-currency expenditure.